SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
June 11, 1998
(Date of Report)
PHOTOMATRIX, INC.
(Exact Name of Registrant as Specified in its Charter)
Commission File No. 000-16055
California
(State or Other Jurisdiction
of Incorporation)
95-3267788
(IRS Employer Identification No.)
1958 Kellogg Avenue
Carlsbad, CA 92008
(Address of Principal Executive Offices)
(760) 431-4999
(Registrant's Telephone No.)
11065 Sorrento Valley Court, San Diego, CA 92121
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Acquisition of I-PAC Manufacturing, Inc.
On June 11, 1998, Photomatrix, Inc. ("the Company") closed the transaction set
forth in the Agreement and Plan of Merger and Reorganization (the "Merger
Agreement") providing for the merger (the "Merger") of Photomatrix's
wholly-owned subsidiary, Photomatrix Acquisition, Inc. ("PAI"), a California
corporation, with and into I-PAC Manufacturing, Inc., a California corporation
("I-PAC"), pursuant to which, among other things, I-PAC became a wholly-owned
subsidiary of Photomatrix and all of the outstanding shares of I-PAC Common
Stock were exchanged for 4,848,000 shares (adjusted proportionately in the event
of the exercise of dissenters' rights) of Photomatrix Common Stock. In addition,
I-PAC shareholders are entitled to receive up to 4,692,239 additional shares of
Photomatrix Common Stock if either (i) I-PAC meets certain performance criteria
during the twelve month period commencing July 1, 1998 or (ii) outstanding
options to purchase Photomatrix Common Stock are exercised.
Under terms of the Merger Agreement, Mr. William L. Grivas and Mr. James P.
Hill, both major shareholders of I-PAC, were nominated and elected to the
Photomatrix Board of Directors. Following the Merger, the Board of Directors of
Photomatrix has seven authorized positions and is now comprised of Mr. Hill and
Mr. Grivas, as well as the current members of the Board: Patrick W. Moore (a
major shareholder and the President of I-PAC), Suren G. Dutia, Ira H. Sharp, and
John F. Staley, with one position to be filled in the future. In addition,
pursuant to the Merger Agreement, Suren G. Dutia has resigned as the Chairman of
the Board and Chief Executive Officer of Photomatrix, retaining the title of
President of Photomatrix, William L. Grivas has been appointed the Chairman of
the Board of Photomatrix, and Patrick W. Moore has been appointed the Chief
Executive Officer of Photomatrix.
In connection with the Merger Agreement and just prior to the closing of the
Merger, all but $25,000 of the approximately $448,000 of outstanding debt owed
by I-PAC to its shareholders and their affiliates was converted to equity in
I-PAC.
The Merger will be accounted for as a purchase of I-PAC by the Company for
accounting and financial reporting purposes. Under the purchase method of
accounting, I-PAC's results of operations will be combined with those of the
Company and I-PAC's assets and liabilities will be recorded on the Company's
books at their respective fair values. A determination of the fair value of
I-PAC's assets and liabilities will be made in order to allocate the purchase
price among the assets acquired and the liabilities assumed. The expected excess
of the value of the merger consideration over the fair value of I-PAC's net
assets will be amortized through charges to earnings over an anticipated period
of twenty-years.
As of June 11, 1998, following the closing of the Merger, the Company had
9,931,017 shares of Common Stock outstanding.
<PAGE>
Item 7. Financial Statements and Exhibits
Item 7 (a) Financial Statements of I-PAC Manufacturing, Inc.
INDEPENDENT AUDITOR'S REPORT
Board of Directors
I-PAC Manufacturing, Inc.
San Diego, California
We have audited the accompanying balance sheets of I-PAC Manufacturing,
Inc. as of December 31, 1997 and 1996, and the related statements of operations
and retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of I-PAC Manufacturing,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ LEVITZ, ZACKS & CICERIC
January 31, 1998
San Diego, California
<PAGE>
I-PAC MANUFACTURING, INC.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
ASSETS
1997 1996
<S> <C> <C>
Current Assets:
Cash $ 17,151 $ 15,616
Receivables 551,473 385,865
Inventories 1,062,692 1,131,332
Prepaid expenses 45,972 27,105
Current portion of notes receivable 16,667 -0-
Total current assets 1,693,955 1,559,918
Notes receivable, less current portion 33,333 -0-
Property and equipment, net 2,506,834 277,944
Other assets 71,587 34,083
Total assets $4,305,709 $1,871,945
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 597,669 $ 421,450
Accounts payable and accrued expenses 574,944 832,135
Accrued compensation and payroll taxes 105,258 94,691
Current portion of long-term debt 69,083 23,402
Accrued cost-discontinued operations -0- 113,394
Total current liabilities 1,346,954 1,485,072
Long-term debt, less current portion 2,245,074 230,389
Notes payable to related party 267,366 146,606
Notes payable to stockholders 180,457 180,457
Other long-term liability 226,790 226,790
Total liabilities 4,266,641 2,269,314
Stockholders' Equity:
Common stock - no par value; 1,000,000
shares authorized;
8,500 shares issued and outstanding 8,500 8,500
Retained earnings (deficit) 30,568 (405,869)
Total stockholders' equity (deficit) 39,068 (397,369)
Total liabilities and stockholders' equity $ 4,305,709 $ 1,871,945
</TABLE>
See accompanying notes to financial statements.
<PAGE>
I-PAC MANUFACTURING, INC.
Statements of Operations and Retained Earnings
Years Ended December 31, 1997 and 1996
<TABLE>
1997 1996
<S> <C> <C>
Sales, net $ 5,441,786 $ 5,188,948
Cost of sales 3,821,249 4,160,025
Gross profit 1,620,537 1,028,923
Selling, general and administrative expenses 1,048,321 928,737
Income from operations 572,216 100,186
Other income (expense):
Other income and expense, net 173,684 16,195
Interest expense (303,863) (100,271)
Income from continuing operating before
provision for income taxes 442,037 16,110
Provision for income taxes 5,600 800
Income from continuing operations 436,437 15,310
Discontinued operations (Note 3):
Loss from discontinued operations (less applicable
income taxes of $-0-) -0- (179,348)
Loss on disposal of discontinued operations during
phase-out period (less applicable income taxes of $-0-) -0- (113,394)
Net income (loss) 436,437 (277,432)
Retained deficit, beginning of year (405,869) (128,437)
Retained earnings (deficit), end of year $ 30,568 $ (405,869)
Earnings per share, basic and diluted:
Income from continuing operations $ 51.35 $ 1.80
Loss from discontinued operations -0- (21.10)
Loss on disposal of discontinued operations -0- (13.34)
Net income (loss) per share, basic and diluted $ 51.35 $ (32.64)
</TABLE>
See accompanying notes to financial statements.
<PAGE>
I-PAC MANUFACTURING, INC.
Statements of Cash Flows
Years Ended December 31, 1997 and 1996
<TABLE>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 5,282,995 $ 5,681,214
Cash paid to suppliers and employees (5,033,634) (5,915,884)
Interest paid (303,863) (100,271)
Income taxes paid (800) (7,233)
Other income (expense), net 58,503 (13,805)
Net cash provided by (used in) operating activities 3,201 (355,979)
Cash flows from investing activities:
Purchase of property and equipment (242,262) (51,659)
Proceeds from sale of property and equipment 4,022 -0-
Net cash used in investing activities (238,240) (51,659)
Cash flows from financing activities:
Net borrowings on notes payable 176,219 421,450
Principal payments under long-term debt (60,405) (18,959)
Borrowing from related party 150,000 -0-
Principal payments under related party debt (29,240) -0-
Net cash provided by financing activities 236,574 402,491
Net increase (decrease) in cash 1,535 (5,147)
Cash, beginning of year 15,616 20,763
Cash, end of year $ 17,151 $ 15,616
</TABLE>
See accompanying notes to financial statements.
<PAGE>
I-PAC MANUFACTURING, INC.
Statements of Cash Flows
(Continued)
Years Ended December 31, 1997 and 1996
Increase (Decrease) in Cash
<TABLE>
1997 1996
<S> <C> <C>
Reconciliation of net income (loss) to net cash provided by
(used in) operating activities:
Net income (loss) $ 436,437 $ (277,432)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 110,826 77,423
Gain on disposition of property and equipment (1,787) -0-
(Increase) decrease in:
Receivables (165,608) 154,723
Inventories 27,143 (366,654)
Prepaid expenses (18,867) (14,859)
Other assets (24,925) (32,779)
Increase (decrease) in:
Accounts payable and accrued expenses (257,191) 25,035
Accrued compensation and payroll taxes 10,567 (34,830)
Accrued cost-discontinued operations (113,394) 113,394
Net cash provided by (used in) operating activities $ 3,201 $ (355,979)
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
In 1996, the Company acquired $76,263 of assets under capital leases.
In 1997, the Company:
Sold inventory and equipment for a note receivable of $50,000.
Incurred long-term debt of $2,111,230 to finance the purchase
of real property.
Incurred long-term debt of $9,541 to finance the purchase of a vehicle.
See accompanying notes to financial statements.
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
Years Ended December 31, 1997 and 1996
Note 1. THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
I-PAC Manufacturing, Inc. (the Company) manufactures custom electronic
and electrical mechanical assemblies, including Printed Circuit Board
(PCB) assemblies, electrical interconnect products and subassemblies in
Carlsbad, California. Its customers, primarily located in the United
States, are major OEM's (original equipment manufacture), to which it
also provides valued-added engineering services. The Company generated
approximately 68% of its 1997 sales from four customers. These four
customers accounted for 24%, 17%, 16% and 11%, respectively, of 1997
sales revenue and approximately $390,000 of receivables at December 31,
1997. The Company grants unsecured credit to its customers.
Principles of Consolidation
The financial statements for 1997 include the accounts of the Company
and its wholly owned subsidiary, Express Assembly Corp. (Express)
purchased as of February 17, 1997 (Note 2). All significant
intercompany accounts and transactions have been eliminated upon
consolidation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Inventory
Inventory is stated primarily at the lower of average cost or market.
Property and Equipment
Property and equipment, including renewals and betterments, are
recorded at cost and are depreciated using straight-line and
accelerated methods over estimated useful lives of 5 to 40 years.
Repairs and maintenance are charged to expense as incurred.
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 1. THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue Recognition
Sales revenue and corresponding expense, cost of sales, are recognized
when the product is shipped to the customer.
Income Taxes
The stockholders have elected to have the Company taxed as a subchapter
S corporation under Section 1362 of the Internal Revenue Code which
provides that, in lieu of federal corporate income taxes, the
stockholders will recognize the Company's taxable revenue and
deductible expenses on their tax return. For California state purposes
a corporate tax is imposed on S corporations at the rate of 1.5% of
taxable income with a minimum of $800.
Note 2. ACQUISITION
On February 17, 1997, the Company acquired Express in a business
combination accounted for as a purchase. Express is primarily engaged
in quick turn prototype assembly and low volume value added
manufacturing. The results of operations of Express are included in the
accompanying financial statements since the date of acquisition. The
total cost of the acquisition was $31,119 which exceeded the fair value
of the net assets of Express by $14,671. The excess is being amortized
on the straight- line method over five years.
Note 3. DISCONTINUED OPERATIONS
At December 31, 1996, the Company's management approved a plan to sell
its 50% interest in Cable Converter Services - West LLC to the other
50% owner and discontinue its related operations of servicing and
repairing cable television equipment. The operations for servicing and
repairing cable television equipment are classified as discontinued
operations in the financial statements.
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Revenues received from discontinued operations were $35,534 and
$347,130 for the years ended December 31, 1997 and 1996, respectively.
The Company has recorded a loss from discontinued operations of
$113,394 for estimated operations through February 28, 1997, the date
of sale. The Company sold related equipment and inventory at net book
value and recorded a note receivable of $50,000, due February 28, 2000.
The note receivable is
Note 3. DISCONTINUED OPERATIONS (continued)
expected to be satisfied by payments and/or credits allowed in
connection with certain future purchases by the Company from the
debtor. In addition, the Company has a purchase commitment of $60,000
expiring February 28, 1999.
Note 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
1997 1996
Receivable
Trade receivables $ 589,244 $ 430,452
Less allowance for doubtful accounts (37,771) (44,587)
$ 551,473 $ 385,865
Inventories
Raw materials $ 1,001,983 $ 983,125
Work-in-process 175,709 301,207
1,177,692 1,284,332
Less reserve for obsolescence (115,000) (153,000)
$ 1,062,692 $ 1,131,332
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (continued)
1997 1996
Property and equipment, net
Land $ 338,110 $ -0-
Building 1,908,453 -0-
Machinery and equipment 444,273 506,734
Equipment 76,263 76,264
Vehicles 18,610 11,408
Building improvements 26,765 21,069
2,812,474 615,475
Less accumulated depreciation and
amortization (305,640) (337,531)
$ 2,506,834 $ 277,944
Other income and expense, net
Rental income $ 112,860 $ -0-
Other income and expense, net 60,824 16,195
$ 173,684 $ 16,195
Rental income is primarily from a month-to-month lease of a portion of
the Company's facilities for $7,500 per month.
The Company incurred rent expense of $33,000 and $183,700 for the years
ended December 31, 1997 and 1996, respectively.
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 5. NOTES PAYABLE
1997 1996
At December 31, 1997, the Company has a
business loan agreement with a bank
expiring in June 30, 1998, which provides
for a revolving line of credit with a
maximum indebtedness of $700,000.
Interest is payable monthly at prime
plus 1.5% (effective rate of 10% at
December 31, 1997). The Company is
required to maintain certain financial
covenants. The borrowing is collatera-
lized by the assets of the Company and
secured by continuing guarantees executed
by its stockholders. $ 522,669 $ -0-
At December 31, 1997, the Company has a
note payable to a bank for $75,000;
interest payable monthly at prime plus
1.5% (effective rate of 10% at December
31, 1997); due on demand or on June 30,
1998. This note is cross-collateralized
with the revolving line of credit business
loan payable to bank. 75,000 -0-
At December 31, 1996, the Company had a
business loan agreement with a bank which
expired in January 1997. It provided for
a revolving line of credit with a maximum
indebtedness of $425,000. Interest was
payable monthly at prime plus 1.5%. -0- 421,450
$ 597,669 $ 421,450
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 6. LONG-TERM DEBT
<TABLE>
1997 1996
<S> <C> <C>
Note payable to bank in monthly installments of
$12,909 including interest at prime plus 1%,
subject to change every five years (effective
rate of 9.25% at 12/31/97); through January 2022;
collateralized by a first trust deed on the
Company's land and building. The Company is
required to maintain certain financial covenants.
The note is guaranteed by certain stockholders.
Certain notes payable to related parties (Note 7)
have been subordinated to this note. $1,477,406 $ -0-
Note payable to finance company in monthly
installments of $5,604 including interest at
7.569% and fees of $793; through March 2017;
collateralized by a second trust deed on the
Company's land and building; guaranteed by the
Small Business Administration; guaranteed by
stockholders. 583,897 -0-
Note payable to bank in monthly installments
of $2,812 including interest at the prime
plus 2.5%, (effective rate of 11% at
December 31, 1997) through March 2005;
collateralized by equipment. 167,898 181,829
Note payable to company in monthly installments
of $1,071 including interest at 18.20%;
through May 2001; collateralized by
equipment. 31,971 38,827
Note payable to company in monthly installments
of $996 including interest at 26.6%;
through June 2001; collateralized by
equipment. 28,340 31,193
</TABLE>
<PAGE>
Note 6. LONG-TERM DEBT (continued)
<TABLE>
1997 1996
<S> <C> <C>
Note payable to an individual in monthly
installments of $694 plus interest at 10%;
through January 2000. Guaranteed by a
stockholder. 17,361 -0-
Note payable to bank in monthly installments
of $327 including interest 14.25%; through
February 2000; collateralized by a vehicle. 7,284 -0-
Other -0- 1,942
2,314,157 253,791
Less current portion 69,083 23,402
$2,245,074 $ 230,389
</TABLE>
Principal payments on long-term debt for years ending December 31 are
due as follows:
Notes Payable Related Parties
Related
Long-term Party Stockholders
Total Debt (Note 7) (Note 7)
1998 $ 69,083 $ 69,083 $ -0- $ -0-
1999 212,125 81,889 130,236
2000 78,106 78,106
2001 73,726 73,726
2002 68,395 68,395
Thereafter 2,260,545 1,942,958 137,130 180,457
$2,761,980 $2,314,157 $ 267,366 $ 180,457
<PAGE>
Note 7. NOTES PAYABLE TO RELATED PARTIES
<TABLE>
1997 1996
<S> <C> <C>
Notes Payable to Company Related by Ownership
Notes payable to company; interest at prime
plus 2% payable monthly; due on demand;
collateralized by a security agreement,
stock pledge agreements and guarantees by
stockholders; subordinated to bank loan
(Note 6); classified as long-term due to
subordination to note payable to bank. $ 137,130 $ 146,606
Note payable to company; in monthly installments
of $3,242 through January 1998 and $129,293.37
due February 21, 1998, including interest at
prime plus 2%; subsequent to December 31, 1997,
the payment date was extended to July 31, 1999;
collateralized by a security agreement and
guaranteed by stockholders 130,236 -0-
$ 267,366 $ 146,606
Notes Payable to Stockholders
Prime plus 2% (effective rate of 10.5% at
December 31, 1997) payable monthly; due on
demand; subordinated to bank loan (Note 6);
classified as long-term due to subordination
to note payable to bank. $ 180,457 $ 180,457
</TABLE>
Interest expense on notes payable to related parties was $37,885 and
$34,658 for the years ended December 31, 1997 and 1996, respectively.
Under the terms on the nonbinding letter of intent to merge (Note 11),
all notes payable to related parties will be converted into equity upon
completion of the merger.
<PAGE>
Note 8. OTHER LONG-TERM LIABILITY
Liability of $226,790 due to a company; non-interest bearing; due April
1998; collateralized by equipment; subordinated to bank loan; to be
repaid at a rate of 40% of the non-material component of any sales made
to the lender. No sales orders have been received from the lender as of
January 31, 1998. Any unpaid balance on the due date will be canceled
and the security interest released. In the opinion of management no
sales orders are anticipated through the due date of this liability.
Note 9. RELATED PARTY TRANSACTIONS
Evergreen Investments (Evergreen), a company owned by two officers and
primary stockholders of the Company, provides management and legal
services to the Company. The Company incurred expenses of approximately
$205,500 and $235,600 for services provided by Evergreen for the years
ended December 31, 1997 and 1996, respectively. During this period, the
two officers and primary stockholders did not receive a salary or
employee benefits directly from the Company. As of December 31, 1997
and 1996, approximately $49,000 and $5,900, respectively, due to
Evergreen was included in accounts payable. Under terms of the
nonbinding letter of intent (Note 11), these officers will become
officers of Photomatrix, Inc. and each will receive compensation as set
by the Board of Directors with an initial annual salary of $125,000. In
connection with this employment, subsequent to the close of the merger,
Evergreen will no longer provide management services to the Company.
For the year ended December 31, 1997, the Company purchased
approximately $6,600 of merchandise from MGS Interconnect (MGS), a
company owned by two primary stockholders of the Company. During 1996,
the Company subcontracted out $57,400 of sub-assembly and other
production work to MGS. The Company also recorded sales to
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
MGS of approximately $47,900 and $88,100 for the years ended December
31, 1997 and 1996, respectively.
Included in receivables at December 31, 1997 and 1996 are $41,373 and
$74,181, respectively, of accounts receivable due from related parties.
Note 9. RELATED PARTY TRANSACTIONS (continued)
During 1997 and 1996, the Company incurred expenses of approximately
$136,700 and $147,100, respectively, for commissions to MGM Tech Rep
(MGM), an outside sales representative firm owned primarily by the
three stockholders of the Company. In addition, at December 31, 1997,
prepaid expenses include approximately $42,200 of commissions advanced
to MGM. The Company received approximately $4,600 of rental income from
MGM for the year ended December 31, 1997.
The Company also incurred expenses of approximately $28,400 and $39,900
for legal services provided by a law firm in which a primary
stockholder and officer of the Company is a partner, for the years
ended December 31, 1997 and 1996, respectively. In addition, the
Company also incurred expenses of approximately $27,500 and $39,700 for
general business consulting services provided by this officer for the
years ended December 31, 1997 and 1996, respectively. During this
period, this officer did not receive a salary or employee benefits
directly from the Company.
Note 10. INCOME TAXES
The components of the provision for income taxes are as follows:
1997 1996
State S corporation franchise tax $ 5,600 $ 800
Deferred income tax -0- -0-
$ 5,600 $ 800
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 11. CONTINGENCIES
During October 1997, the Company executed a nonbinding letter of intent
to merge with a publicly traded company (Photomatrix, Inc.). Under the
terms of the nonbinding letter of intent if either party terminates the
merger negotiations without the written consent of the other, the party
causing the termination will pay the other party $100,000.
Note 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments are as
follows:
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Cash $ 17,151 $ 17,151 $ 15,616 $ 15,616
Note receivable including
current portion 50,000 50,000
Liabilities:
Notes payable 597,669 597,669 421,450 421,450
Long-term debt including
current portion 2,314,157 2,355,993 253,791 253,791
Notes payable to related
party 267,366 267,366 146,606 146,606
Notes payable to stock-
holder 180,457 180,457 180,457 180,457
Other long-term liability 226,790 -0- 226,790 226,790
The fair value of the note receivable is not determinable because a
quoted market price is not available and the cost of obtaining an
independent valuation is excessive.
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
The fair value of long-term debt, including current portion, is
estimated using interest rates currently available for long-term debt
with similar terms and remaining maturities. The fair value of notes
payable, notes payable to related party and notes payable to
stockholders approximates carrying value given the variable interest
rates provided in the notes.
The fair value of the other long-term liability is estimated based on
the expected cancellation in April 1998.
It is not practicable to estimate the fair value of guarantees on
behalf of the Company (Notes 5 and 6), however, the Company does not
expect to require payments on its behalf with respect to these
guarantees.
<PAGE>
Item 7 (b) (1) Pro Forma Financial Information
UNAUDITED PROFORMA COMBINED FINANCIAL STATEMENTS
The Unaudited Pro Forma Combined Financial Information set forth below is
based on the historical financial statements of Photomatrix and I-PAC after
giving effect to the purchase method of accounting and other adjustments
relating to the combination for the periods ended and as of the dates indicated.
The historical financial statements of I-PAC for the year ended December 31,
1996 and the nine months ended September 30, 1997 have been combined with the
historical financial statements of Photomatrix for the year ended March 31, 1997
and the nine months ended December 31, 1997 respectively. The Unaudited Pro
Forma Combined Balance Sheet gives effect to the combination as of December 31,
1997. The Unaudited Pro Forma Combined Statements of Operations are presented to
give effect to the combination as if it had been consummated on April 1, 1996
for the fiscal year ended March 31, 1997 and the nine months ended December 31,
1997.
The Unaudited Pro Forma Combined Financial Information set forth below
reflects pro forma adjustments that are based upon available information and
certain assumptions that the Company believes are reasonable. In preparing the
Unaudited Pro Forma Combined Financial Information, the Company believes it has
utilized reasonable methods to conform the basis of the presentation. The
Unaudited Pro Forma Combined Financial Information is intended for informational
purposes only and is not necessarily indicative of the future financial position
or results of operations of the Company had the combination described above
occurred on the indicated dates or been in effect for the period presented.
The Unaudited Pro Forma Combined Financial Information should be read
in conjunction with, and is qualified in its entirety by, the historical
consolidated financial statements of Photomatrix and I-PAC including in each
case, the related notes thereto, included elsewhere, or incorporated by
reference herein.
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR FISCAL YEAR ENDED MARCH 31, 1997
<TABLE>
Historical
` -------------------
The Company
Pro Forma Pro Forma
Photomatrix I-PAC Adjustments(5) Combined(3)
----------- ----- -------------- -----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $1,165,000 $17,000 -- $1,182,000
Accounts receivable, net 1,086,000 551,000 -- 1,637,000
Inventories, net 2,915,000 1,063,000 -- 3,978,000
Prepaid expenses and other 159,000 46,000 -- 205,000
Current portion of notes receivable -- 17,000 -- 17,000
Total Current Assets 5,325,000 1,694,000 -- 7,019,000
Notes Receivable, Long Term -- 33,000 -- 33,000
Property and Equipment, Net 912,000 2,507,000 -- 3,419,000
Intangibles and Other Assets, 1,395,000 -- 1,477,000 2,872,000
Other Assets 151,000 72,000 -- 223,000
$7,783,000 $4,306,000 $1,477,000 $13,566,000
Current Liabilities:
Accounts payable $516,000 $575,000 -- $1,091,000
Accrued and other liabilities 634,000 105,000 -- 739,000
Customer deposits 451,000 -- -- 451,000
Current portion of long-term debt 162,000 667,000 -- 829,000
Net liabilities of discontinued 1,238,000 -- -- 1,238,000
operations
Total Current Liabilities 3,001,000 1,347,000 -- 4,348,000
Notes Payable to Related Party 252,000 448,000 ($423,000)(6) 277,000
Other Non-Current Liabilities 101,000 2,472,000 -- 2,573,000
Contingent Liabilities -- -- -- --
Total Liabilities 3,354,000 4,267,000 (423,000) 7,198,000
Shareholders' Equity
Preferred Stock -- -- -- --
Common Stock (1) 19,351,000 8,000 1,931,000 21,290,000
Retained Earnings (Deficit) (15,063,000) 31,000 (31,000)(5) (15,063,000)
Other 141,000 -- -- 141,000
4,429,000 39,000 1,900,000 6,368,000
Total Shareholders' Equity $7,783,000 $4,306,000 $1,477,000 $13,566,000
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR FISCAL YEAR ENDED MARCH 31, 1997
<TABLE>
Historical
-------------------------
The Company
Pro Forma Pro Forma
Photomatrix I-PAC Adjustments Combined(3)
--------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $8,694,000 $5,189,000 -- $13,883,000
Cost of Revenues 6,400,000 4,160,000 -- 10,560,000
Gross Profit 2,294,000 1,029,000 -- 3,323,000
Operating Expenses:
Selling, general and administrative 3,311,000 929,000 74,000(4) 4,314,000
Research and development 807,000 -- -- 807,000
Facility consolidation and relocation 520,000 -- -- 520,000
Total Operating Expenses 4,638,000 929,000 74,000 5,641,000
Operating Income (Loss)(7) (2,344,000) 100,000 (74,000) (2,318,000)
Other Income (Expense), Net 158,000 (84,000) 49,000(6) 123,000
Income (Loss) From Continuing Operations
Before Income taxes (2,186,000) 16,000 (25,000) (2,195,000)
Provision for Income Taxes 104,000 1,000 -- 105,000
Income (Loss) from Continuing Operations ($2,290,000) $15,000 ($25,000) ($2,300,000)
Income(Loss) from Continuing Operation per ($0.44) $ 1.80 ($0.23)
Common Share, Basic and Diluted(1)(3)
Number of Shares Used in Computation(1) 5,083,000 8,500 9,931,000
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
Historical
--------------------------
The Company
Pro Forma Pro Forma
Photomatrix I-PAC Adjustments Combined(3)
------------ --------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $6,076,000 $4,472,000 -- $10,548,000
Cost of Revenues 3,968,000 3,097,000 -- 7,065,000
Gross Profit 2,108,000 1,375,000 -- 3,483,000
Operating Expenses:
Selling, general and administrative 2,376,000 679,000 55,000(4) 3,110,000
Research and development 580,000 -- -- 580,000
Write Off Capitalized Software 366,000 -- -- 366,000
Total Operating Expenses 3,322,000 679,000 55,000 4,056,000
Operating Income (Loss)(7) (1,214,000) 696,000 (55,000) (573,000)
Other Income (Expense), Net 87,000 (88,000) 37,000 36,000
Income (Loss) From Continuing Operations
Before Income Taxes (1,127,000) 608,000 18,000 (537,000)
Provision for Income Taxes(8) -- 6,000 243,000 249,000
Income (Loss) from Continuing Operations ($1,127,000) $602,000 $261,000) ($786,000)
Loss from Continuing Operation per
Common Share, Basic and Diluted(1)(2) ($0.22) $ 70.82 ($0.08)
Number of Shares Used in Computation(1) 5,083,000 8,500 9,931,000
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
<PAGE>
1) Under the Merger Agreement, Photomatrix will issue to the stockholders
of I-PAC 4,848,000 shares of Photomatrix common stock at the Effective
Time of the Merger. After the end of a twelve month period ending June
30, 1999, up to 3,744,902 additional shares may be issued to I-PAC
shareholders based upon the achievement of certain performance
milestones. The effect of the earn-out on earnings per share is
accretive, as shown at Additional Earn-out Shares, pages 10-13. In
addition, I-PAC shareholders will also be issued one additional share
for each currently outstanding stock option or warrant that is
exercised. As of March 16, 1998, there were 907,333 options and
warrants to acquire Photomatrix common stock outstanding. If all such
options and warrants are exercised, I-PAC shareholders will receive an
additional 907,333 shares, resulting in an additional 1,814,666 shares
being issued. The Unaudited Pro Forma Combined Balance Sheets reflects
the issuance of 4,848,000 shares only. The market value of a share is
assumed to be $0.40, the price of the stock prior to the announcement
of the Merger.
2) Loss per share basic and diluted for the period and year presented are
based on weighted-average number of shares outstanding during the year.
In accordance with Statement of Financial Accounting Standards No. 128
(Earnings Per Share), potential dilutive securities were excluded from
the calculation as their effect is antidilutive.
3) The Unaudited Pro Forma Combined Balance Sheet as of December 31, 1997,
reflects both company's balance sheets as of that date. The Unaudited
Pro Forma Combined Statement of Operations for the nine month period
ended December 31, 1997 reflects Photomatrix's results of operations
for the nine months then ended and I-PAC's results of operations for
the nine months ended September 30, 1997. The Unaudited Pro Forma
Combined Statement of Operations for the year ended March 31, 1997
reflects Photomatrix's results of operations for the year then ended
and I-PAC's results of operations for the year ended December 31, 1996.
4) The Unaudited Pro Forma Combined Statement of Operations for the nine
months ended December 31, 1997 and the year ended March 31, 1997,
assumes the Merger occurred as of April 1, 1996 and the resulting
goodwill of $1,477,000 was amortized beginning April 1, 1996 using a
twenty year amortization period. The Unaudited Proforma Combined
Statement of Operations also assumes that the fair value of assets
acquired and liabilities assumed in the Merger is the same as their
historical cost basis, in that substantially all such assets and
liabilities are current and therefore approximate fair market value,
except for I-PAC's land and building. I-PAC's land and building were
acquired during the year ended December 31, 1997, and the Company
currently believes that historical cost approximates their fair market
value.
CALCULATION OF GOODWILL:
Price paid for stock $1,939,000
Fair value of net assets purchased (39,000)
Conversion of I-PAC related party debt to Equity (423,000)
Goodwill recognized $1,477,000
CALCULATION OF AMORTIZATION:
Years to amortize Goodwill 20
Monthly amortization amount $6,154
Amortization expenses for:
12 months ended March 31, 1997 $74,000
9 months ended December 31, 1997 $55,000
5) The Pro Forma Adjustments include adjustments to eliminate I-PAC common
stock and retained earnings.
6) The Unaudited Pro Forma Combined Balance Sheet reflects the conversion
from long term debt to equity of $423,000 of related party debt,
together with the elimination of the related interest expense.
<PAGE>
7) The Unaudited Pro Forma Combined Statement of Operations does not
reflect cost savings which have already been implemented at Photomatrix
or are anticipated as a result of eliminating redundant functions and
costs, as follows:
<TABLE>
Description Manufacturing Selling G&A R&D
----------- ------------- ----------- ---
<S> <C> <C> <C>
Cost reduction already implemented (a) $ 100,000 $ 300,000 -
Elimination of Photomatrix facilities costs (b) $ 192,000 $ 122,000 $36,000
Elimination of redundant functions (c) $ 65,000 $ 170,000 -
Reduction of related party expenses (d) - $ 115,000 -
$ 357,000 $ 707,000 $36,000
</TABLE>
a) In January, 1998, Photomatrix made certain cost reductions
as a result of reducing manpower and other expenses in its
manufacturing, sales and administration areas.
b) Under terms of the Merger, Photomatrix operations will be
moved to I-PAC's Carlsbad facility and its current facility will be
sub-leased or assigned.
c) Reflects the elimination of redundant functions and
positions between the companies.
d) The parties have agreed that all future related party
transactions will be subject to review and approval of the audit
committee, and further that certain related party expenses will be
eliminated.
8) Calculated as if I-PAC were a C corporation using an effective tax rate
of 40%
<PAGE>
Item 7 (c) Exhibits
The following exhibit is incorporated by reference to this report:
2.1 Plan and Agreement of Merger and Reorganization, dated March 16, 1998, by
and among Photomatrix, Inc., Photomatrix Acquisition, Inc. and I-PAC
Manufacturing, Inc., incorporated by reference from the definitive proxy
materials filed with the Securities and Exchange Commission pursuant to Schedule
14A on May 13, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: June 25, 1998 PHOTOMATRIX, INC.
By:/s/ Roy L. Gayhart
-------------------------------
Roy L. Gayhart, Chief Financial
Officer
